On January 1, 2011, Q-Mart entered into a five-year lease agreement requiring annual payments of $10,000 on December 31 of each year. The fair market value of the facility was estimated by appraisers to be $39,927.
a. Record the journal entries required over the five-year period, assuming that Q-Mart accounts for this arrangement as an operating lease.
b. Compute the effective interest rate on the lease, and record the journal entries required over the five-year period if Q-Mart accounts for this arrangement as a capital lease.
Assume that the capitalized asset is depreciated over a five-year period, using the straightline method with no salvage value.
c. Compare the effects of the two accounting methods on the financial statements. Discuss.